Giving credit where it’s due

How identity data is driving an alternative market for measuring trust

The credit scoring industry is changing in profound ways that will affect just about everyone. And it is the profusion of personal data that reveals so much about us that is driving that change.

Let’s face it, there’s always been something mysterious and slightly random about credit checks. You know you’re good for it – you’ve kept a clean slate and paid your bills on time – and yet you can never rule out that you’ll get declined because the ‘computer says no’ at the moment of truth. Some obscure error or trivial mistake that’s been festering, gnawing away at your hard-earned credit rating.

The problem is that we’re never sure exactly what we’re being scored on. Unless we get a copy of our credit report we can’t see the errors and inaccuracies until it’s too late. It’s a hassle to fix and – more importantly – it is a real worry when you consider that credit scores are now being used more widely than just financial services as an indicator of more general trustworthiness. It might be a potential employer or landlord that is basing a decision on that score.

These are the issues addressed by a detailed report by research and strategy company One World Identity. Its paper – ‘Bad credit? No credit? Big identity problem’ – looks to an emerging market of alternative credit scoring that takes in far broader sweeps of data, from connected devices to social media.

It makes for a read that is both exciting in terms of the innovations we can expect to see, and worrying when you consider the lack of protections for using seemingly inconsequential data for such serious and important decision making.

Internet of Me spoke to OWI Principal Analyst Kaelyn Lowmaster about some of the challenges this changing landscape presents and how it will affect us all.

Principal Analyst Kaelyn Lowmaster

“I don’t think people are aware of the amount of that data they are sharing already, particularly in terms of social media and the apps they are using,” she says. “So much of that data is already being used for things like marketing so it’s not that much of a stretch, given the regulatory void in which we’re working, for them to be used for other use cases, such as credit scoring.

“Part of the problem is getting people to engage with their own data and the rights they have over it. In terms of making people comfortable with it I think there’s a huge gap between what people say they’re OK with and what their behaviour actually indicates they’re OK with. To a certain extent I don’t blame consumers for being neglectful of that.”

Kaelyn cites the finding that to fully read all the privacy policies encountered by the average American would require 250 hours of reading every year. Taking a ‘life’s too short’ attitude when agreeing the T&Cs of a social network is one thing, but there is more at stake in the burgeoning market of alternative credit scoring.

OWI has formulated a visualised framework, the Trust Assessment Pyramid, which groups different types of identity information into four tiers. The legacy scoring data most of us would be familiar with is at the top, with each successively larger tier representing the wider range of available data. Tier two, then, includes non-traditional financial data such as balance fluctuations and recurring payments. Tier three covers data such as internet and device usage, call and texting behaviours, and social media connections. At the bottom of the pyramid, in the fourth tier, is ‘qualitative offline behaviours’ which is described as data that is ‘inherent to an individual’s personality’, such as psychometric, health or other identity data.

The OWI Trust Assessment Pyramid

One of the headline benefits from this potentially huge expansion of the credit scoring market is the opportunity for greater financial inclusion. The shortcomings of traditional credit scoring systems apply only to the people lucky enough to be on the radar of the big credit reporting agencies. Billions of people worldwide have too little data on which to base such decisions and so are excluded altogether from access to financial products and opportunities. Building a credit profile is often a catch-22, with your ability to get credit among the key criteria for getting credit.

Now, though, the ready availability of many different sets of personal data means there are more ways to work out if someone is going to reliably meet their obligations. That’s got to be good news for people who have been barred from doing things like getting a mortgage or starting a business.

But this is where the difficulty creeps in – consumers will be asked to share data that has little to directly do with what it is being used for.

Kaelyn says: “There is going to have to be a regulatory framework around establishing transparency both in terms of service and how that data is used to make customers more comfortable with the idea of balancing that financial inclusion and more accurate scoring with privacy and, to a certain extent, data ownership on the part of the consumer.”

Then there could be the problem of unintended consequence if data shared for one specific purpose ends up having some influence on another, completely separate purpose or being interpreted differently.

Kaelyn says: “There are concerns that a more complete credit scoring picture using more data points could actually lower people’s credit scores. This is particularly true of utility data and people who might not be able to keep up with utilities and heating over winter months and catch up over summer. That’s just one case.

The One World Identity logo

“To a certain extent, with credit scoring in particular, there are some regulatory structures in the US – which is not the most advanced data protection regulatory regime by any stretch of imagination – such as the Equal Credit Opportunity Act that prohibits discrimination in credit scoring based on religion, race, sex, marital status and so on.

“It is a slippery slope – if you’re using my social data you know I’m connected with certain people who might not be very savoury so you might give me a higher interest rate on a mortgage I’m going to take out. That’s really close to saying because you’re of a particular religion or ethnic group you’re not considered a reasonable credit risk. It’s definitely a concern we need to keep an eye on.”

The Equifax data breach earlier this year, which affected 145million US customers and nearly 700,000 in Britain, highlighted the need for more robust regulatory structures as the sector grows.

“Getting the regulatory process involved in the innovation process as early as possible is vital,” says Kaelyn. “We’ve already seen, particularly in wake of the Equifax breach, some degree of legislation that is being put forward in the US about how credit scoring can be used which I think is long overdue. It will take much time and overcoming entrenched interests to move beyond this.

Equifax will be a shot across the bow in terms of waking people up

“I think Equifax will be a shot across the bow in terms of waking people up to the extent to which better data protection regulation is necessary and the extent to which the American credit scoring system is not the most efficient way to gauge digital reputation moving forward.”

Kaelyn believes it is in the express interests of innovators in this new space to work with regulators if they are to succeed.

“We often hear people talking about innovation and regulation as mutually opposing forces but when you’re talking about this new ecosystem, the personal data economy, and talking about monetising the use of personal data, leaving regulation out of that conversation puts entrepreneurs’ business models at risk. If you don’t involve the regulators early on, you run the risk of getting the kibosh put on your entire business model later on.”

Building and maintaining consumer trust will be another vital requirement for businesses operating in the alternative credit arena, says Kaelyn.

“Companies are going to have to take it into their own hands to prove they are going to be good stewards of your data now that the average consumer is going to be aware that their data is valuable and potentially at risk.”

She adds that while technological advances such as personal data stores, platforms and blockchain-driven services offer consumers greater control, ownership and privacy, they are not necessarily a silver bullet.

“A more informed customer is a good development,” says Kaelyn. “The more informed and more control they feel they have, the better protected they are likely to be. When you talk about new platforms and ownership of data, the level of trust that a consumer enjoys has really only shifted locations.

“It means you don’t have to rely on trusted institutions in order to make data-related transactions happen, but really you’ve just shifted the trust from a traditional financial institution or legacy service provider to a different platform or technology or algorithm.

“While customers having more knowledge about how their data is transacted is a good thing, I’m a little worried about the fact that consumers might not have visibility about how that data is stored, who is writing the code or how it is actually being used. More ownership is better, more clarity is better but in terms of granular knowledge of how data is being transacted, I think there is still room for improvement.”

You can order the full One World Identity report here – and Internet of Me readers get a 20 per cent discount by using the code IOM20 at the checkout.